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HDFC Bank Ltd. | HDFCBANK | NSE - Banks

INR in Million. Fiscal year ends in March. Figures are consolidated and restated.

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Profitability Ratios

Net Interest Margin

The most important ratio when it comes to banks and financial companies is the is Net Interest Margin. It is the difference between the interest income generated and the amount of interest paid out to their lenders (deposits), divided by total assets.

It is similar to the gross margin of non-financial companies. An ideal financial company should have NIM above 3%

Return on Assets and Return on Equity - HDFC Bank Ltd.

Return on assets tells you what percentage of every dollar invested in the business was returned as profit. It simply shows how effective the company is at using those assets to generate profit. Avoid investing in a financial company whose ROA is below 1%.

Return on equity measures the percentage of profit we make for every dollar of equity invested in the company. Ideally a financial company should have an ROE above 10%.

Liquidity Ratio

Loan to Deposit Ratio - HDFC Bank Ltd.

Loan to Deposit ratio (Credit to deposit) also known as LTD is commonly used to asses the bank's liquididty. It is calculated by dividing the bank's total loans(advances) by its total deposits. If the ratio is too high, it means the bank might not have enough liquidity to cover any unforseen fund requirements. LTD above 100% is not healthy. If customers begin to pull deposits, the bank might be suddenly strapped for cash.

Loan to Deposit ratio = Loans and advances / Deposits * 100

Financial Leverage Ratio - HDFC Bank Ltd.

Financial leverage ratio also known as financial leverage or leverage is a measure of how much assets a company holds relative to its equity. A high leverage ratio means that the company is using debt and other liabilities to finance its assets. Leverage is a double-edged sword. The most obvious risk of leverage is that it multiplies losses. A bank that borrows too much money might face bankruptcy during a business downturn, while a less-levered bank might survive. A financial leverage ratio above 10 is aggressive. The leverage ratio of Lehman Brothers in 2007 was 30, no wonder it declared bankruptcy during the downturn.

Financial leverage ratio = Total Assets / Shareholder Equity

Borrowings to Networth Ratio

The higher the ratio, the greater risk will be associated with the firm. A lower ratio generally indicates greater long-term financial safety. A firm with a low borrowing/networth ratio usually has greater flexibility to borrow in the future. A highly leveraged company has a limited debt capacity and the huge debt becomes a huge liability during a recession. Total borrowings include long-term debt, short-term debt and bank overdraft. Borrowings to Networth above 150% is not healthy.

Borrowings to Networth = Borrowings / Shareholder Equity

Overall Performance

Company Performance

Watch the overall performance of revenue and profit, needless to say you should invest in a company whose numbers are going up.

Net Income & Cash from Operations

Operating cash flow is a better metric of a company's financial health for two main reasons. Cash flow is harder to manipulate than net income (although it can be done to a certain degree). Second, "cash is king", a company that does not generate cash over the long term is on its deathbed. Investors can avoid a lot of bad investments if they analyze a company's operating cash flow.

Net Income (Income Statement) and Cash from operations (Cash Flow Statement) should ideally be parallel. A consistently falling or negative operating Cash Flow(OCF) despite a rising net profit is a cause for concern because of aggressive accounting techniques or high working capital requirements. An ideal company has a higher operating cash flow than its net profit (income).

HDFC Bank Ltd. Net NPA Ratio & Provision for Non Performing Assets

NPA ratio is used to measure the asset quality of the bank's loan books. NPA are those assets for which interest is overdue for more than 3 months. Net NPA ratio above 1% is not healthy. If the NPA ratio for the last 10 years stays below 1% then that is a sign of good management.

Keep an eye on HDFC Bank Ltd.'s total provision for non performing assets. Nothing eats away at a bank's profits more than loan loss provisions. A huge spike up is not a good sign.

Stock Dilution - HDFC Bank Ltd.

Stock dilution occurs when a company issues additional shares. This increase in common shares occurs when employees exercise their stock options, secondary market offering or by conversion of convertible bonds, preferred shares or warrants into stock. When a company can increase its profitability at a rate greater than the dilution then the dilution is acceptable but in most cases the company is not able to do so resulting in higher net income but lower EPS because of which the shareholders suffer badly.

The above chart tells you if the company is issuing additional shares thus decreasing your ownership. An ideal company should not even issue a single additional share after an IPO.